Some guide on internatioal trade business in China
An article wrote for NINGBO GUIDE magazine, and published on the Vol 1, Issue 3, August 2007.
By Sun Jin(Marlow), Chinese attorney at Law, Zhejiang Xinmu Law Firm
Some data indicates that after China joined the WTO, China's import and export volume grew by 30%~40% each year, and it is now ranked as the third-largest in the world. As a lawyer practices law matters of international trade and international investment in China, the writer is seeing growth. At same time, many foreign merchants are falling into embarrassing situations while carrying on their import and export businesses in China, this essay is written for them.
Let's follow Mr. A's steps. Mr. A is a businessman from USA, or somewhere else, and he is an importer and distributor of an electric scooter, or something else. He is new to China and China is new to him, too. He met Mr. B on a B2B website who said he is the boss of an electric scooter factory in Zhejiang. And Mr. A is really happy with B's quotations. However, as he knows little about Chinese suppliers, he has a little doubt about B's company's situation, and would like to verify the company. A Chinese lawyer offered to assist him.
***Verification of a company registered in China.***
In today's mainland China most official business organizations are in form of Limited Liability Company. For a Chinese trading or manufacturing company registered at the local municipal industry and commerce bureau, the company must have a business license. And it's a simple job for a lawyer to investigate the company's original registration application files in the local municipal industry and commerce bureau. From the files, we can get some basic information like the company's legal name and address, legal representative, registered capital, and so on. So, if B's company is a registered company, buyers can gain a basic level of trust so as to start business with them. If need more information, Due Diligence will be needed.
After getting the lawyer's positive investigation report, Mr. A felt better. He placed a small order of US$3, 000 to the supplier; the payment term is T/T in advance.
However, after A received the cargo in the destination seaport, he found that nearly half of the scooters were defective. So, he requested to return the defective cargo to B and a partial refund of the payment. The supplier did not agree. Again, he turns to a local lawyer's help.
***Lawyer's letter: notice of claims and final notice before legal actions***
At this stage of a lawyer's job, the lawyer can send a notice letter of claim to the supplier under authorization of Mr. A, and before deciding to take further legal actions like a lawsuit, the lawyer can send another final notice before legal actions to the supplier as well, while in lots of situations above two letters are in one. In traditional Chinese culture of Konfucian's theory, a lawsuit was not a right choice and not a recommended solution to disputes, so most Chinese peopledetested lawsuits. At that time we had two other types of society controlling strength in coexistence with judicial strength, morality and clan/family strength. Nowadays, the situation might have changed a lot, however the remaining effects of traditional culture still exist. After B gets the lawyer's final notice letter, under the pressure of facing a lawsuit and after considering the whole situation, Mr. B agrees to A's return of cargo, but said that he will send replacements instead of a refund. A agrees.
One month later A got the replacements, and to A's great surprise, the replacements were perfect. So game is not over here yet. After some consideration, Mr. A wanted to place a larger order of US$30, 000. Same as the first order, B wanted A to make the payment via T/T. Mr. A now has a standing legal advisor in China, and his lawyer offered the following solutions regarding payment to B.
***Payment terms and related solutions***
For a payment sum larger than $10, 000 USD, it is strongly recommended to make payment by Letter of Credit. At the same time, do not make the L/C terms very complicated. If the supplier is new but really wants some deposit from the buyer in cash, at same time the buyer can not give the supplier a basic trust, then the buyer can choose to make payment in trust of his lawyer. It's something similar to escrow. A precondition is the sum is not big, like several hundreds or thousands of US$. When the payment is large, the buyer might have to pay it to the supplier's account directly, as the supplier needs to receive the foreign currency directly in order to apply for a refund of the value-added tax from the Chinese government (about 5%~17% of cargo's CNY value). So it's not a small amount when the total sum is big.
Finally the both parties agreed to close the deal with payment term of L/C. However, Mr. A is still a little worried about the cargo's quality. As the L/C itself can not offer the buyer any guarantee regarding cargo's quality. At the time, Mr. A hears from one of his friends, who tell him that pre-shipment inspection is very important and really works. However, his lawyer says something more.
***What will really work in the game, pre-shipment inspections or contracts?***
Generally buyers will not place an order until he is satisfied with the price quotation he received. So in next step, he will face problem of quality controlling. Somebody said pre-shipment inspection can control the situation. It's true that pre-shipment inspection is fairly important, and via your eyes and tests, you can find some obvious defects. However, we can not expect that cargos' defects are always so obvious that can be easily found merely by eyes and simple tests. Inspection is a very technical job, and a well-furnished laboratory is needed to make a full and professional test over the subject goods, from raw materials to technically performances. And if the buyer comes to China to inspect it in person, the costs will be high. So we have to consider other important measures to control the situation, like choosing a right factory, and contract management. You can inspect your shipment and devise payment terms in your favor; but the real game is drafting sound contracts in compliance with Chinese Law. Inspection problems and all other problems are solved through dispute resolution. Clear and concise contracts with suppliers usually allow you to resolve these issues without having to go to arbitration or court, or making endless threats but receiving nothing. Another example is when the buyer's order requires some new molds be tooled; generally the suppliers will request the buyer to shoulder part or all of the tooling costs. But the mold's ownership is not clear yet, which will need an agreement to specify it. If there is no such agreement, and when cooperation breaks up, both parties will have disputes over it, which may lead to a lawsuit. In brief, contracts/agreements are your own rules of the game, laws are also rules, but it's more like a final relieve because of its universality.
So Mr. A comes to China, and visits Mr. B and his factory inZhejiang. Both parties have a very pleased meeting and sign one sales/purchase contract. Mr. B is a really friendly and hospitable guy, and offers all of his possible assistance to Mr. A while A is on his business trip in China. And surely there are nice Chinese dishes, bars, and so on. It seems that they have become good friends. At least Mr. A's business trip to China is great. And two month later, Mr. A gets his container.
Well, we must say sorry to Mr. A, to go ahead with our story, this order of $30, 000 must have quality problems again which will lead to a lawsuit or arbitration case. Lots of capable local suppliers here, but Mr. A is unlucky. After he received his second order's cargo and sold it to his clients, he received complaints from his clients. It seems that about half of the electric scooters have some inner defects.
And this time, the situation is a little bit complicated. Mr. B insists his products have no problems, but Mr. A insists that the cargo is definitely unacceptable. The situation does not come to an extreme example, and both parties need not make threats to each other. Our honorable judges or arbitrators will decide the duties of both parties according to their contracts, and the cargo itself as well.
A's lawyer received complains from both parties about the other party in the negotiations before official legal actions. Mr. B said Mr. A is really impenetrable, they were so friendly before to each other, and he had done so much and spent lots of money for Mr. A especially when he was in China, but now he raises a lawsuit against him while he believes that cargos has no problems. Mr. A has the same complaint that Mr. B is impenetrable, too. It will be a hard job for a lawyer to explain the cultural differences here. Even in domestic Chinacultural differences exist, merchants in Zhejiang are doing business in a fairly different manner from merchants from North China and also different from merchants from Guangdong. Not saying the merchants from different nations. However, we are lucky that we still have something in common: laws, international trade traditions, and profits.